How economic integration creates new battlelines

Wednesday

Mar 12, 2014 at 6:00 AM

By Peter S. Cohan WALL & MAIN

One of the most interesting moments of my life happened about 10 years ago. And as I watch what is happening now in the handling of the Ukraine crisis, I realize more than ever how important that moment was.

In November 2003, I was speaking about my book, "Value Leadership," at a conference in Hong Kong at the Grand Hyatt hotel — a spectacular venue with a great view of the Hong Kong skyline. The interesting moment was the 90 minutes during which I listened to former president, Bill Clinton, give a speech on the importance of economic integration.

Before getting into the details of what that means and why it's important, consider the scene. The hall in which Mr. Clinton spoke was crammed with chairs before he arrived. Everyone who entered the room had to go through security screening and the room was filled with people who looked like Secret Service agents. And when he arrived in the hall, Mr. Clinton did not enter from the back and walk up to the stage. Instead, he entered from behind a curtain at the front of the stage. And when he spoke, it felt to me as if he had mesmerized every individual in the audience — somehow he had magically tuned into their mental frequencies and kept everyone rapt.

I also remember at the end of the speech, crowds of people rushed towards the stage to get his autograph and talk to him. After he finished with about 40 minutes of that, Mr. Clinton disappeared behind the curtain. And a few minutes after that, a beautiful woman from the audience walked up to the stage and similarly disappeared behind the curtains. I do not remember much about Mr. Clinton's speech. But one theme still sticks in my mind: The idea that if countries are economically dependent on each other, there is less of a chance that they will go to war.

Mr. Clinton's reasoning was clear enough: If you have wealthy supporters whose business success hinges on being able to sell their products or raise capital in other countries, then you will be less willing to make military moves that put your business supporters in jeopardy.

Since the crisis in the Ukraine began a few weeks ago, I have been thinking about Mr. Clinton's speech. After all, were Russian oligarchs not dependent on Europe as a market for their products and on London — in particular — as a place to sell shares of their companies to global investors and otherwise get their cash in a place that Vladimir Putin does not control.

Were it not for that economic integration, Russia would probably have no reason not to send its troops into the Ukraine and take it over. But thanks to Russia's economic integration with the West, the U.S. may be able to influence the outcome in Ukraine without firing a shot.

That is really an ideal outcome, since it is nearly impossible to create a compelling case to the American people that we should put boots on the ground in Ukraine to keep Russia from taking it over. There is little immediate strategic threat to the U.S. from such an invasion; nor is there an economic threat.

And thanks to the idea of economic integration — about which Mr. Clinton opined so eloquently many years ago — we have considerable leverage through our ability to impose economic sanctions with teeth against Russia. As the New York Times reported in 2012, Mr. Putin urged Russian oligarchs to bring their money back home.

And in 2014, it is clear that he was right to make that recommendation if his goal was to give himself unfettered ability to push around the rest of the world. After all, he noted that foreign governments where that wealth resides have power over those Russian oligarchs. Mr. Putin is trying to force Russian oligarchs to stick with his policy in Crimea — which appears to involve taking over the country without using a military force that wears a Russian uniform.

But losing access to capital from the West "is a frightening thought for Russian business leaders, whose voice in foreign policy decision-making is muted compared with the tight circle of Mr. Putin's former K.G.B. colleagues, for whom economic factors may be secondary," according to the Times.

Aleksandr Y. Lebedev, a banker who sold most of his Russian assets after public disputes with Mr. Putin, told the Times, "I've seen 10 people from the Forbes list in the recent few days. They're pale; they don't understand. But the oligarchs realize, he said, that their interests carry no weight in this situation, especially if they, own property outside Russia."

Economic integration offers many options for sanctioning Russia without firing a short.

According to the Times, "Officials have suggested that a range of measures is being considered, leaving open, by implication, the most extreme one: Barring Russian companies and banks from access to the Western financial system, similar to sanctions adopted against Iran."

Whether the threat of economic sanctions works to keep Russia from taking over the Ukraine, there is no doubt in my mind that Mr. Clinton was right to talk about the importance of economic integration.

After all, the threat of economic sanctions is politically palatable in the U.S., whereas military intervention is not. And they just might work.

Peter Cohan of Marlboro heads a management consulting and venture capital firm, and teaches business strategy and entrepreneurship at Babson College. His email address is peter@petercohan.com.